How to Get a Mortgage After Bankruptcy and Foreclosure

It’s possible, but you’ll need to rebuild your credit before you apply

Losing your home to foreclosure or being forced to declare bankruptcy can take a toll on both your well-being and your wallet. If you’ve filed for bankruptcy or been through foreclosure at some point, all is not lost. If you take the right steps, it can be possible to obtain a mortgage and buy a new home.

Key Takeaways

  • Bankruptcy or foreclosure remains on your credit report for at least seven years.
  • By paying bills on time and keeping your credit utilization ratio low, you can begin to rebuild your credit.
  • After two or three years, you may be eligible for a new mortgage.
  • Once you go through a bankruptcy or foreclosure, you will have a higher interest rate than you would have paid before your financial difficulties.
  • Taking out a mortgage that you know you can manage financially is important after going through a previous foreclosure.

Step 1: Review Your Credit Reports

Chapter 13 bankruptcies and foreclosures can remain on your credit report for at least seven years; Chapter 7 bankruptcies can linger on credit reports for up to 10 years. Unfortunately, you can’t do anything to remove those negative marks sooner. But it’s important to monitor your credit reports during this time.

First, review your credit reports from each of the three major credit bureaus. Check to see that all of the accounts that were included in your bankruptcy filing are being reported properly. If you went through foreclosure, make sure that’s being reported properly as well.

Next, look for any errors or inaccuracies. Even a small error could cost you points from your credit score. If you spot an error, you have the right to initiate a dispute with the credit bureau that’s reporting the information. Equifax, Experian, and TransUnion allow you to initiate disputes online.

If the credit bureau determines that an error or inaccuracy exists, they’re required to either correct it or remove it from your report. Either one could help to raise your score, which could improve your chances of getting a mortgage later.

Tip

You can get one copy of your credit reports for free each year through AnnualCreditReport.com.

Step 2: Rebuild Your Credit

Both bankruptcy and foreclosure can do significant damage to your credit score, although their effect will recede over time. In addition to correcting any errors that you find on your credit reports, you can take some positive steps to increase your score.

Some of the best ways to improve your credit scores over time include:

  • Paying bills on time, or early if possible, every month
  • Applying for a secured credit card and making on-time payments
  • Maintaining a low credit utilization ratio on any credit cards that you might be using after bankruptcy or foreclosure
  • Applying for a secured or unsecured credit builder loan to establish a positive payment history

It’s very important to avoid late payments after bankruptcy or foreclosure, as they can be damaging to what may be an already-low score. Also, use discretion when applying for new credit cards or loans, as each new inquiry can deduct points from your score.

Note

Before applying for any credit card or loan, check to see if your payments will be reported to the credit bureaus—which could help to improve your score.

Step 3: Establish Consistent Income

Maintaining a steady income following a bankruptcy or foreclosure is important for several reasons.

First, it’s an opportunity to build some savings. You can establish an emergency fund and work on setting aside some money toward a down payment once you’re ready to try buying a home again.

Next, having a steady income can make you appear less risky in the eyes of lenders once you do apply for a mortgage. Generally, lenders prefer to see homebuyers with lengthy employment histories and consistent income each month.

Also, keep in mind that special rules may apply if you’re self-employed or run a business. In that scenario, lenders may want to see at least two years’ worth of income history vs. one. So it’s also important to maintain good records of your income. That can include W-2s, 1099s, and copies of pay stubs.

Note

The types of income that qualify for a mortgage can vary by the type of loan but may extend to wages, salaries, commissions, self-employment income, dividends, alimony payments, and child support.

Step 4: Be Patient and Research Loan Options

If it has been less than two years since your debts were discharged through bankruptcy, then you will need to wait to apply for a mortgage. If you lost your previous home to foreclosure, then you may have to wait longer—typically at least three years.

You can use this time to work on building your credit up while also researching the requirements for different mortgage loans. The kinds of loans that you may able to get following a bankruptcy or foreclosure can include:

Each type of loan has different requirements regarding credit scores, income, assets, and debt. Of these options, an FHA loan may be best suited for someone coming out of bankruptcy or foreclosure. It’s possible to get an FHA loan with a down payment as low as 3.5% and a credit score of 580. You could even purchase a home using an FHA loan with a credit score as low as 500 if you’re able to put 10% down.

Important

If you’re applying for a new mortgage after a bankruptcy or foreclosure, expect to make a substantial down payment and pay a higher interest rate.

Step 5: Prepare to Apply 

Once you’ve established good credit again and gone through the necessary waiting period, what’s next? First, you’ll want to make sure that you have an adequate down payment saved up. The amount you need can depend on the loan. Again, with FHA loans, you can purchase a property with as little as 3.5% down. USDA and VA loans have no down payment requirements. But you’ll generally need 20% or more down to get a conventional loan without paying private mortgage insurance (PMI).

Organizing certain documents can help you get mortgage-ready. Some of the things that a lender may ask for include:

  • W-2s
  • 1099s
  • Tax returns
  • Pay stubs
  • Bank statements
  • Retirement or investment account statements

Keep in mind that if your credit score is still low because of a bankruptcy or a foreclosure, you’ll likely pay a higher interest rate on your loan than you would otherwise. That, in turn, will affect how much you can afford to pay for a home. If you’ve had problems in the past, you probably don’t want to stretch yourself too thin with significant mortgage payments, anyway.

Using a mortgage calculator is an excellent resource to budget these costs.


The lender may want a co-signer, so keep that in mind. Check with relatives or friends who may be willing to co-sign the loan for you. Bear in mind that they will be responsible if you can’t make the payments—which could destroy your relationship with them—so do this only as a last resort.

How long does a foreclosure stay on your credit?

A foreclosure can stay on your credit report for up to seven years. In terms of negative credit effects, those are typically strongest in the first two to three years following the foreclosure. Over time, the impact of foreclosure on credit scores can gradually fade.

Can you buy a house after a foreclosure?

You can buy a house after a foreclosure, but you will need to get your “financial house” in order. Taking the time to rebuild your credit, save for a down payment, and, as a last resort, line up a co-signer can help you prepare for buying a home.

What happens when you have a bankruptcy and a foreclosure?

It is possible to file for bankruptcy and keep your home out of foreclosure by the bank. You may be able to keep your home if you file for bankruptcy depending on the type of bankruptcy and if you have equity in your home. Of course, if your home goes into foreclosure and then you file for bankruptcy, you may lose your home.

The Bottom Line

Many people hit financial rock bottom at some point in their lives and end up with bankruptcy or foreclosure on their record. If that has happened to you, it doesn’t mean that you have to give up your dream of owning another home. You may only have to postpone the dream for a bit. Meanwhile, you can use that time to shore up your credit and save for a down payment.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Experian. “How Long Does a Bankruptcy Stay on Your Credit Report?

  2. Experian. “How Long Does a Foreclosure Stay on Your Credit Report?

  3. myFICO. “Chapter 7 & 13: How Long Will Negative Information Remain on My Credit Report?

  4. Federal Trade Commission, Consumer Advice. “Disputing Errors on Your Credit Reports.”

  5. AnnualCreditReport.com. “Home Page.”

  6. myFICO. “Credit Checks: What Are Credit Inquiries and How Do They Affect Your FICO® Score?

  7. U.S. Department of Housing and Urban Development. “Mortgagee Letter 10-29: Minimum Credit Scores and Loan-to-Value Ratios,” Page 2.

  8. U.S. Department of Housing and Urban Development. “Let FHA Loans Help You.”

  9. U.S. Department of Agriculture, Rural Development. “USDA Housing Loans Offered with Zero Money Down.”

  10. U.S. Department of Veteran Affairs. “Purchase Loan.”